RBI Monetary policy: 'Rate Cut' or 'Not'! These factors will surround gov Shaktikanta Das' decision
Inflation has been under RBI's 4% target for the past 7 months and is expected to remain range bound for another quarter.
All eyes are watching RBI governor Shaktikanta Das, as he along with his MPC members will present India's first bi-monthly monetary policy for FY20 tomorrow. RBI is an inflation trajectory central bank, and current data of CPI inflation has opened the gates for not one but many rate cuts in this fiscal. Inflation has been under RBI's 4% target for the past 7 months and is expected to remain range bound for another quarter. Additionally, subdued domestic economic growth could also prompt the RBI to lower its interest rates.Currently, policy repo rate stands at 6.25%, with reverse repo rate at 6%, while MSF and bank rate at 6.5%. India’s policy stance has also been changed to neutral from previous calibrated tightening.
Whether RBI decides to make rate cut in policy repo rate or not, will be keenly watched. However, there are list of factors which will surround the central bank's decision.
Here's the important factors to note, as per CARE Rating.
1. Higher growth in credit vis-a- vis deposits
Growth in deposits and credit has been higher in this year vis-à-vis previous year. The deposits grew by 7% on a y-o-y basis as end of 29th March’19 compared with the 3.3% growth in the corresponding period previous year.
Likewise, the bank credit at Rs 95.5 lakh crores witnessed a growth rate of 10.8% y-o-y compared with 6.4% in the comparable period a year ago. The credit growth has also surpassed the growth in deposits, resulting in persistent liquidity deficit in the system.
2. Liquidity conditions continue to remain taut, despite some moderation
The liquidity condition in the banking system continues to be strained with liquidity deficit at Rs 1.15 lakh crores as of March 29, 2019 being 70% higher than that in the corresponding period last year.
However, considering only the daily repo and reverse repo operations, the banking system has been in liquidity surplus with RBI absorbing Rs 0.26 lakh crores as on March 29, 2019.
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3. Liquidity developments!
The RBI has injected liquidity to the tune of Rs 2.99 lakh crores by way of OMO purchases during FY19.
The RBI has also infused liquidity by way of currency swap ($5 billion), injecting Rs 34,561crs into the banking system. In addition, the RBI has announced one more round of rupee-dollar swap to the tune of $5 billion i.e. scheduled on April 23, 2019.
Economists at CARE Rating said, " We believe that RBI would go in for 25 bps rate cut to provide much needed thrust to the economic growth. In addition, inflation being well within the RBI’s target would further provide an elbow room to the RBI to lower the interest rates."
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